Report: Australia at risk of financial losses from climate change

March 15, 2024|Written by Moriah Costa

As climate change worsens in Australia over the next few decades, insurance companies and banks could stop servicing areas more vulnerable to extreme weather events, creating further economic severity, a government report found.

The Australian government released its first National Climate Risk Assessment on Tuesday and found that the country is likely to see an increase in the frequency and intensity of extreme weather events, including wildfires, heatwaves, drought, coastal flooding and erosion, flooding, and increased ocean temperatures.

The assessment highlighted 11 areas that are more at risk from climate change, including water, agriculture, economic resilience and the natural environment.

While climate economic volatility is hard to assess, it’s likely to create macroeconomic shocks across the whole country. In a worst-case scenario, insurers and banks could withdraw from highly-exposed communities in response to extreme weather events.

“Such a shock in the local financial system may have cascading effects on infrastructure… potentially creating vulnerabilities in various communities with further potential flow-on impacts or pressures on other systems such as health and social support and primary industry and food,” the report says.

Further impacts on the financial system could come from increases in insurance claims, increased loan losses, and asset price write-downs for investors. These risks also include the difficulty in quantifying climate change impacts which makes it challenging to plan for. This financial instability could cause reduced confidence in the economy, as well as price shocks.

“Financial system responses to climate change, including increased insurance premiums or reduced insurance availability, can have adverse impacts on households and businesses,” the report says.

The assessment also highlights broader international dangers from climate change to the Australian economy, including increased migration and disruptions to trade.

Australian insurers have already increased premiums partly due to extreme weather events, which have also helped to fuel inflation. The dangers highlighted in the report reflect warnings from other countries.

recent report from the California Department of Insurance found that US insurers could lose billions of dollars due to transition shock. Insurers in some states prone to wildfires and flooding, such as California and Florida, have increased premiums or even stopped new offerings as a result of increased severe climate events.

The Australian government will use the assessment in creating an adaptation plan to mitigate the risks in the report, which it aims to publish by the end of the year.

This page was last updated March 15, 2024

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